Financial journalist Dan Burrows recently picked Caterpillar (NYSE:CAT) as one of the 10 best stocks to buy for 2012. His thesis was that the company has more growth ahead, especially if a more stable recovery takes shape in the next several months.
I agree with that upside potential — but I’d add that Caterpillar also has remarkable stability that will serve it well, even if the broader economy does backslide. The growth of Caterpillar is impressive, but its size and balance sheet also make it a fairly attractive defensive play, too. CAT doesn’t just cash in on construction equipment, but also supplies miners in South America and China. This emerging-market growth evens out Caterpillar, so don’t fall into the trap of thinking it’s a cyclical stock that lives and dies with housing.
Here’s the breakdown:
- Dividend and cash: At just 1.6%, Caterpillar isn’t burning down the house with its yield. But an attractive spin to that yield is that the payout ratio is only about 24% of company profits. S&P dividend payout ratios are at a record low of just 27% — and simply must go up. CAT is even less than its peers, so a significant hike could be in store. What’s more, Caterpillar has a stockpile of $3 billion in cash and operating cash flow of more than $7 billion by recent estimates — up about 40% from OCF of $5 billion as of Dec. 31, 2010.
- Performance: In the short term, CAT stock has been phenomenal. It’s up against a 52-week high and has logged a stunning 27% return year-to-date in 2012 vs. just 6% for the Dow and 9% for the S&P 500. But in the long term, Caterpillar is equally impressive. Five-year returns top 72%, vs. just 7% for the Dow Jones and a loss of 1% for the S&P 500! And after all that, the forward P/E of Caterpillar is about 11.9 based on fiscal 2012 EPS forecasts of $9.65.
- Growth: Revenue has almost doubled since recession-era lows, from $32.4 billion in 2009 to $60.1 billion last year. Caterpillar has tallied seven straight quarters of revenue growth and eight straight quarters of profit growth. Most impressive is that EPS numbers have been simply off the chart as CAT has come roaring back. Earnings went from $1.43 in fiscal 2009 to $4.15 in 2010 — almost tripling. Then they went to $7.40 last year for another 80% gain. This year? Well the forecast has cooled to “only” 30% growth based on that $9.65 forecast. Most encouraging of all is that while revenue and profits are soaring, inventories are not swelling — meaning the more Caterpillar makes, the more it is selling. That’s a great sign.
You probably don’t need to be sold on the defensive nature of McDonald’s (NYSE:MCD). The company has gotten really aggressive with recent dividend increases, and is the 900-pound gorilla of the fast-food industry. McDonald’s isn’t going anywhere.
However, this company continues to crank out great growth, too. Thanks to a push into emerging markets and constant innovation with new menu items — from premium coffees to healthy kids options — McDonald’s revenue and earnings still have some pretty good upside.
Here’s the rundown:
- Dividend and cash: Perhaps no company has been more aggressive in repaying its shareholders across the past few years. In 2007, it paid 50 cents. Now it pays $2.80 annually. Name another stock that has increased dividends across the recession like this — I dare you! That dividend is soundly sustainable, too, with $2.4 billion in cash and short-term investments. To top it off, total cash flow from operating activities is a cool $6.3 billion as of the end of 2011 — up 10% from the previous year.
- Performance: Most investors should be very acquainted with the blowout gains of McDonald’s stock. MCD was the top performer in the Dow for 2011 with returns of roughly 29% vs. a flat S&P and a 5% gain for the Dow. Year-to-date in 2012, MCD has lost a little steam … but the long-term performance is pretty dramatic. McDonald’s shares have more than doubled in five years vs. a loss for the the S&P 500! The P/E is a little on the high side at 17 or so based on 2012 earnings, however, so keep that in mind.
- Growth: McDonald’s has posted nine straight quarters of revenue growth and 10 straight quarters of EPS growth on a year-over-year basis. Full-year earnings for 2012 are projected to be more than 50% higher than fiscal 2008 numbers, and the company has gotten earnings down to a science. Like clockwork, McDonald’s beats expectations and tallies 7%-10% profit growth in each quarterly report. On a raw-number basis, the growth might not be as impressive as Intel or Caterpillar, but the sustained growth in sales and profits for this blue chip can’t be discounted.
Jeff Reeves is the editor of InvestorPlace.com. Write him at firstname.lastname@example.org, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.